Gold Fades From Investment Picture

By Matt Day, Francesca Freeman

The investor gold rush that propelled the precious metal to a dozen years of annual price gains is on the verge of ending with a whimper.

Russia’s central bank in September sold gold for the first time in a year, according to the latest data from the International Monetary Fund. Since the start of 2010, Russia has accounted for 30% of all gold purchases made by central banks that report to the IMF.

Like other emerging-market nations, Russia bought gold to diversify its foreign-exchange reserves. The retrenchment of Russia and others is the latest factor to weigh on gold prices, which are down 19% year to date. The last time gold prices posted an annual loss was 2000.

Gold’s rise was powered initially by the introduction of financial products in the mid-2000s that made the metal more accessible to investors of all stripes. After the financial crisis, gains accelerated as investors snapped up gold amid fears that central banks’ easy-money policies would stoke inflation and diminish the value of paper currencies.

Five years later, inflation remains subdued, dimming gold’s allure.

Gold, which yields nothing and can be costly to hold, also is looking less attractive compared with more mainstream investments. The widespread belief among many investors and analysts that the Federal Reserve will scale back its bond-buying program soon has boosted bond yields, and steady U.S. economic growth has brought major stock indexes back to record territory.

“Gold really doesn’t have much to offer,” said Joseph Murphy, a senior analyst who helps manage about $2 billion at Hermes Commodities, a unit of Hermes Fund Managers Ltd. in London. Hermes has trimmed its gold holdings this year. “People are seeing better opportunities, whether that be in bonds or equities.”

Big-name hedge-fund managers have been caught in this year’s downdraft. The gold fund managed by John Paulson’s Paulson & Co. has lost money. In June, veteran stock picker Jeffery Vinik closed his hedge fund and returned several billion dollars to investors after poor performance tied to an ill-timed bet on gold-mining stocks, which tend to track gold prices.

Central banks sold gold regularly until 2009. As a group, they became net buyers in 2010. The shift was driven by emerging-market central banks, which were grappling with rapidly rising foreign-exchange reserves that were a result of large trade surpluses.

But this year the tide has turned. Because of slowing economic growth and investors’ increasing preference for assets in the developed world, these emerging-market central banks have been using cash reserves to stem economic turmoil and support their currencies. That leaves fewer dollars available to buy gold.

Central banks are on track to cut back their gold-buying by 34% in 2013, according to forecasts by metals consulting firm Thomson Reuters GFMS. The retrenchment follows two consecutive years of rising purchases, according to the IMF.

Russia sold 12,000 ounces of gold in September, the first such sale in a year, according to IMF data.

This year’s decline in gold prices has prompted cautious central banks to stick to the sidelines until the market becomes more stable, analysts and bankers say.

“It really does blunt the support that gold has,” said Jeff Wright, an analyst with H.C. Wainwright & Co. “Purchasing by central banks was the fail safe, the line in the sand [supporting prices in] a volatile market. It’s a very important shift.”

This year through August, central banks increased their gold stockpiles by 6.2 million troy ounces, compared with 9.6 million ounces in the same period in 2012, according to the IMF.

The IMF collects details on gold holdings through voluntary reports from central banks. While the data is considered accurate for most countries, analysts say China’s reported reserves of 33.9 million ounces of gold—the world’s fifth-highest—likely underestimates the real total. Overall, the IMF estimates central banks own just over one billion ounces of gold, or about 29,000 metric tons.

To be sure, most central banks are holding on to the gold they have bought, and many analysts expect them to continue building their reserves of the metal, if at a slower pace. Prices have begun to creep up off their summer lows, as investors push back the date when they expect the Fed to start tightening. Gold futures were little changed on Monday, closing at $1,352 an ounce on the Comex division of the New York Mercantile Exchange.

Speaking at a gold industry event in September, central-bank officials from France, Germany and Argentina said that gold’s volatility hadn’t prompted any of their banks to plan to sell the metal.

Central-bank officials say they buy gold as part of an investment strategy whose time is measured in decades. They view gold holdings in a similar light as their hoard of dollars or yen: as a backstop to help keep economic conditions stable, or a tool to intervene in currency markets. Whether they have made or lost money on their investment is secondary, many say.

“We don’t follow trends,” said Juan Ignacio Basco, deputy general manager of the central bank of Argentina, speaking on the panel. “We need to be very cautious and move slowly.”

Still, investors say it will be more difficult for gold prices to rally with central-bank appetites on the wane.